Utility Mergers--A New Twist in Power Game
Why does Southern California Edison, the electric company for much of Los Angeles and Orange counties, want to merge with San Diego Gas & Electric, the utility serving the area directly south of Edison’s?
The answer, strangely enough, is competitive reasons. SCEcorp, as the Edison company now calls itself, is afraid that if San Diego Gas completes a merger with Tucson Electric Power Co., an aggressive Arizona utility, that merged company would begin poaching its customers.
Tucson, a much smaller company than either SCE or San Diego, has built a profitable business in recent years by selling coal-generated electricity to industrial customers in the California market for 1 to 2 cents per kilowatt-hour less than it can be produced here.
What’s going on? Electric utilities traditionally weren’t supposed to compete. They were given a monopoly for a service area because regulators believed that was the cheapest way to provide electricity to customers.
But times and industries change. Years ago electric companies had to constantly throw up new generating plants to meet the rapidly growing demand for electricity. Now they don’t have to, because electricity usage--thanks in part to conservation learned during the 1970s energy crisis--is not growing as rapidly. So with less need to build new facilities and with cash earnings from older plants, many electric companies have spare generating capacity or spare cash or both.
But at the same time they face a threat of defecting industrial customers, who seek the lowest possible rate by playing the electric company off against alternative supplies--electricity co-generated by waste heat from their own facilities, for example, or purchased from other utilities.
It can get to be a vicious circle, with business customers deserting and residential customers forced to pay higher bills to support the electric plants the utility is required by law to maintain. In a way, what electric companies face today is the dilemma of American Telephone & Telegraph before the breakup--as it watched big corporations use the Bell system merely as a backup for their own private lines and exchanges.
So electric utilities have begun to compete far and wide for customers, trying to more efficiently use their plants, lower their average costs and thus survive in what has become a consolidating industry.
Savings Not Disputed
SCEcorp, for example, says its spare capacity can benefit San Diego customers, whose electric bills are higher than those of Edison customers. SCE Chairman Howard P. Allen issued a statement on Tuesday promising lower rates for San Diego customers if the merger goes through, and lower rates in the future for Edison customers, too, because of efficiencies in generation and transmission. Something for everybody, in other words.
Are the promises realistic? No question savings are possible, says analyst Walter H. Bissell of Duff & Phelps, a Chicago research firm. Bissell cites the example of PacifiCorp, the former Pacific Power & Light of Portland, Ore., which is merging with Utah Power & Light, subject to regulatory approval in the seven Western states where they do business. The idea in that merger is that peak demand in one area can be supplied during hours of slack demand in another. The goal is lower operating costs, yielding lower electric bills for customers, who would then use more electricity which would yield higher profits for shareholders.
Call it the new vision for a business that has seen some companies fall into severe difficulties--notably Public Service of New Hampshire and Long Island Lighting--and now is seeing mergers of the weak into the strong. “From 150 utility companies, in 10 years you’ll see 50,” says analyst Edward Tirello Jr., of Shearson Lehman Hutton, the brokerage company that has set up a takeover investment fund with shares of 60 utility companies. Fund holders get a payoff when one of the companies gets taken over, as happened recently when Southern Co. acquired Savannah Power.
Is there a risk here? Yes, there’s the risk of financial possibilities outrunning common sense--as happened in the 1920s when utilities were merged into giant holding companies. Already some electric companies are using spare cash to look for earning power in other fields, as FPL Group (Florida Power & Light) did in 1985 when it acquired Colonial Penn Life Insurance. It may have looked like a natural marriage--a Florida utility buying a company that specializes in insurance for the elderly. But Colonial Penn lost money in 1986 and, though it is now recovering, it was hardly a propitious start for the merged couple.
The danger is that utilities--a field never noted for brilliant managers--will lose money in acquisitions and run into difficulties meeting their primary obligations to supply electricity.
On the other hand, if merging utilities can deliver the savings they are promising, consolidation in the electric industry is not only inevitable but a good idea. SCE’s Chairman Allen says the merger with San Diego G&E; will yield $100 million in savings. Shearson Lehman reckons the savings will be $200 million. Customers throughout Southern California, and stockholders everywhere, can only hope those calculations prove correct.
Related Story, Part I, Page 1.
